Mike Mayo Cuts His BofA Estimate After Shareholder Meeting

Count CLSA analyst Michael Mayo among the ranks of the underwhelmed after Bank of America Corp.’s annual shareholder meeting.

After the Wednesday meeting, Mr. Mayo cut his estimate for 2014 per-share earnings to 55 cents, from $1, saying he didn’t think the bank has set aside enough money for a potential settlement with the Justice Department over mortgage-backed securities.

In a note to clients, Mr. Mayo said he was glad that multiple directors spoke at the meeting, but he complained of canned answers from directors and executives. When Mr. Mayo asked what processes had gone wrong in the bank’s $4 billion capital error announced last week, Chief Financial Officer Bruce Thompson replied that the bank continues “to do the root-cause analysis of this.” When Mr. Mayo asked how much the bank had set aside in reserves for a DOJ settlement, Mr. Thompson said that predictions on legal expenses are always “rapidly evolving.”

Mr. Mayo said he thinks the bank has set aside about $2.4 billion for such a settlement, and that it could run to a tune more like $8 billion.

Keep in mind, though, that the size of such settlements are difficult to predict, with the government sometimes throwing out face-slap numbers to get a bank’s attention and then walking back. Last year, the DOJ initially suggested a $20 billion price tag for a mortgage-backed securities settlement with J.P. Morgan Chase & Co., before eventually settling for $13 billion.

In fact, if you want a second opinion that predicting legal settlements is often just a form of guessing, ask Mr. Mayo. In February 2013 he released a note citing a legal analyst who said that a separate Bank of America settlement, with private mortgage-securities investors, could swell to as much as $25 billion or $30 billion. In February a judge approved that settlement at $8.5 billion.